I am always getting emails from people seeking free advice on what jurisdiction/law they should put in their China contract.  My answer is always the same: I have no idea.  The reason I never have any idea of what to put in someone else’s contract is because the answer always varies based on multiple facts.

But one of the most important facts we look to when considering the dispute resolution jurisdiction for our contracts is that which would most harm our client. Let me explain. If a large company, let’s call it company ZZZZ is buying $100,000 worth of widgets each month from a Chinese manufacturer, ZZZZ is at risk for the following, among others:

  • Getting $100,000 of bad product
  • Not getting any product at all
  • Having the Chinese manufacturer try to steal ZZZZ’s customers
  • Having the Chinese manufacturer make ZZZZ widgets on the side and sell them all over the world
  • Having the Chinese manufacturer make ZZZZ widgets and sell them all over the world even after ZZZZ terminates the Chinese manufacturer

In many instances the last two examples, particularly the last one, are going to be a foreign company’s biggest risk.  Most companies can recover from one bad shipment. Having to fight off massive quantities of low priced product clones is usually more problematic.

So let’s say ZZZZ faces the last situation.  Its former manufacturer in China has all of ZZZZ’s molds and is refusing to return them. Instead, the Chinese manufacturer is using those molds to make ZZZZ widgets and then is selling those widgets around the world for half of what ZZZZ ordinarily sells them.  ZZZZ clearly has a massive problem on its hands.  What can it do?

Well if ZZZZ’s contract with the Chinese manufacturer called for litigation in the United States, ZZZZ could sue the Chinese manufacturer in the United States and presumably prevail. At that point, ZZZZ would have a United States judgment against the Chinese manufacturer but there would be little ZZZZ could do with that judgment.  ZZZZ could use that U.S. judgment to try to seize U.S. assets that belong to the Chinese manufacturer, but since most Chinese manufacturers have no U.S. assets, that is not likely to help much. And since Chinese courts do not enforce U.S. judgments, the U.S. judgment would be of pretty much zero value in trying to stop the Chinese manufacturer from continuing to produce ZZZZ’s widgets. For more suing Chinese companies in the United States, check out Suing Chinese Companies In US Courts. The Pros And The Cons.

If ZZZZ’s contract with the Chinese manufacturer called for arbitration in Hong Kong or Singapore, ZZZZ would be facing somewhat similar issues in that arbitral bodies in neither place have any authority to issue orders requiring a company in China to cease from manufacturing.

But if ZZZZ’s contract with its former Chinese manufacturer provided for litigation before a Chinese court, ZZZZ would have a decent chance of securing a court injunction against the Chinese manufacturer, stopping it from producing ZZZZ’s widgets.

In “Shanghai Courts Adopt New Methods to Compel Compliance of Preliminary Injunctions in Intellectual Property Infringement DisputesDenning Jin of China mega-firm King & Wood Mallesons, explains how this all works. Mr. Jin’s post is on how the Shanghai No. 1 People’s Intermediate Court recently took strong measures to ensure that its patent infringement injunction would be enforced.

After the injunction was issued, the judges in charge of executing the injunction went to the exhibition to serve the order on the Guangdong company. As part of execution of the preliminary injunction, the judges also ordered the company to remove displays of the allegedly infringing products. The judges gave the Guangdong Company 24 hours to comply with the orders. Several days later, the Court responsible for executing the order discovered that the Guangdong Company had not ceased the sale and display of the allegedly infringement products. The Court quickly assembled a group of more than ten judges and bailiffs to go to the Expo Center and enforce the order. At the Expo Center, enforcement was obstructed by employees of the Guangdong company. In response, the judges took the employees to court and punished the Guangdong company and certain individuals through fines and detention.

The post notes how in China preliminary injunctions are only available in intellectual property disputes. It then sets out the criteria for such injunctive relief, which criteria is very similar to that in the United States:

1.  The applicant must hold  stable and valid intellectual property right.  The party seeking the preliminary injunction must own the intellectual property at issue and it must be able to prove that its rights to the intellectual property are “legitimate, valid and stable.”

2. A preliminary review has determined that the respondent is infringing.  This requires that the respondent is the party infringing, that the respondent is highly likely to have been committing the alleged infringement, that the alleged infringement has been committed or is about to be committed, and that the alleged act is highly likely to be deemed an infringement after a full trial.

3. The applicant will be irreparably harmed if the infringement is not stopped.  Irreparable harm generally means that monetary damages will not be enough to make the applicant whole.  China’s courts may presume irreparable harm in the following circumstances:

  • The alleged infringement harms personality rights, such as copyright-related moral rights;
  • Occurrence or continuous occurrence of the alleged infringement will severely affect the applicant’s market share or other significant interests; or
  • The alleged infringement’s scope and harm, if not stopped, would severely expand. For example, in the case discussed above, the alleged infringing products were displayed at an international exhibition. If the alleged infringement was not stopped, the harm caused to the applicant would expand beyond the damages incurred from a simple, one time sale of the products at issue..

In addition, when evaluating “irreparable harm”, the court also considers the respondent’s creditworthiness and solvency. The worse a respondent’s creditworthiness, the more likely that a preliminary injunction will be issued against him.

In the United States, parties seldom fail to abide by a court ordered injunction and those that do generally face major consequences as that failure will usually be held to be a contempt of court.  See China Tooling/China Consulting — I Told You So. The problem with injunctions in China, however, has been its courts do not always have or employ the tools to make sure their injunctive orders are obeyed. This makes protecting your IP in China all that more difficult:

In China respondents may refuse to obey a preliminary injunction even after it has been served to them by a court. Such disobedience severely diminishes the value of the preliminary injunction system and may seriously injure the applicants’ interests. The issue of determining how to enforce a preliminary injunction has not yet been effectively resolved. A recent case involving the application of a preliminary injunction by an entertainment company against a singer and another entertainment company demonstrates the typical difficulties that arise when preliminary injunctions are issued. In that case, the first in which a preliminary injunction targeted which songs could be performed at a concert, the court demanded the singer not sing the allegedly infringing songs at a concert due to alleged copyright infringement. However, the signer ignored the injunction and sang the allegedly infringing songs. The court subsequently fined the infringing parties a total amount of RMB210,000, an amount considered grossly inadequate compared to the harm suffered by the applicant for the alleged infringement.

Mr. Jin sees this Shanghai court’s aggressive enforcement of its injunction as indicating an “increasing willingness” to enforce injunction and I agree. If you want to protect your IP in China and protect it fast, a preliminary injunction from a Chinese court will likely be your best bet. Think about that when you are trying to decide what to put in your contract’s jurisdictional clause.

What do you think?